Will Apple Grow in This Area?AAPL) makes up a substantial portion of its revenues that are not coming from the iPhone sales. In the past 12 months, App Store and other services have contributed 9.0 % of Apples total revenue. In the March 2016 ended quarter, Apple generated close to 11.85 % of its revenue from services. That compares with a revenue share of close to 8 % in the previous quarter and 8.61 % in the year ago quarter. That was also the highest contribution to the company’s revenue by services after Q3 2014.
A closer look
The services section of Apples range of offerings includes products like Apple Pay, Apple Music, iTunes and the App Store.
This was a significant growth and shows that Apple has focused on the services segment more than ever. In the midst of the maturing smartphone markets and decline in iPhone shipments, services could just be that bright spot for the company. The Services segment is increasingly being seen as the key growth driver for Apple due to a customer base of more than 1 billion across all Apple devices and its ability to generate recurring revenues.
Competition by numbers:
It’s not hidden that Google’s Android mobile operating system is the biggest competitor for Apple’s iOS. The same is true of the online stores offered by the two giants. Apple offers its services and software via its App Store (iTunes) which is an online market store that can be downloaded using the iOS. And locked in a battle with the App Store is Google’s Play Store which is available on Android devices.
Both of them have a gamut of services and software related to apps, music, books, films, and TV series and both have made records in terms of number of apps available and number of cumulative downloads till date.
The Apple App Store was started in 2008 with the launch of iPhone 3G. It had only 500 apps to start with. But its growth was exponential and it crossed the 1 million apps mark by 2013. It was well over 1.2 million by the end of the first half of last year. By the month of June 2015, App Store hit the 100 billion app downloads mark too.
On the other hand, Google’s Play Store (initially Android Market) was opened with a few apps in 2008. The growth was faster than App Store, and the Play Store managed to clinch the top spot in terms of number of apps available by the end of 2014. Also, the number of app downloads from Google Play Store exceeded that from Apple App Store by 70 % at the end of Q1 2015. This lead stood at 60 % in Q3 2015.
The other prominent online stores like Windows Phone Store, Amazon Appstore and BlackBerry World have their own patrons in place. But their numbers are no match compared to Apple or Google. Thus, Apple has had Google as its first and foremost competitor to deal with for all these years in the world of services and software distribution platforms for mobile apps.
Revenue wise, App Store earns 75 % more revenue than the Play Store does today. And this lead has widened from a 70 % difference in 2014. It’s a fact that Apple’s first hand customers come from higher income families and can afford more money to buy apps compared to the buyers of Android devices. Hence, Apple’s higher services revenue is as obvious as is Android’s higher app downloads.
Most of the apps on Android are free to download. According to AppBrain, Android has a total of 1.4 million apps on it. Out of that only about 200,000 apps are pay-for apps while some 1.2 billion are all free. And out of the free apps, about 110,000 apps offer in-app billing. Hence, most apps on Android devices only make money via adverts. On the other hand, App Store gives nothing for free and monetizes everything it offers to the benefit of the developer. Therefore, more app developers might be interested in developing apps on the iOS.
But the hindrance to writing an app on iOS is that you need an Apple device for that which is again expensive. On the other hand Android apps can be written on Windows, OS X or Linux which makes it easier and drives the number of apps available on Google Play Store higher than on Apple App Store.
From the customer’s view point, using Play Store offers much more flexibility than using App Store. You always need to download iTunes if you want to use App Store on other than iOS device. That is quite annoying in today’s web-centric, cloud-centric world. For Google Play, these complexities do not exist.
Apple’s steps toward increasing subscriptions:
Almost all the services provided by Apple are paid. The user pays for them either one time or on a recurring basis. Now, as there is an upper limit to the number of active devices present worldwide, the number of users of the services will also be limited after a point of time. So, the way forward is maximizing the number of subscriptions of the services and their renewals.
Toward this, Apple has recently decided to encourage more developers to sell subscriptions. For this, Apple will give up half of its 30 % share of revenue coming from long term subscriptions to the app developers. That means the revenue from subscriptions running for longer than a year will be split 15 % and 85 % between Apple and the developer respectively. Till now the split was 30 % and 70 %.
With the recurring fee introduced, the number of subscribers may decrease. Still, subscription revenues amount to far more than one time download charges. The Verge quoted a developer saying that even with half the number of downloads his company could make 10 times its current yearly revenue if it switched from its current app purchase fee to a $ 4 per month subscription.
In addition to that, customer friendly search related ads will also be allowed on the App Store. That could drive more revenue for the California tech giant.
Apple’s device sales are no longer growing. In the last six months, Apple's three biggest-selling products -- iPhones, Mac computers and iPads -- posted revenue declines of 8 %, 6 % and 20 % respectively, compared with figures in the period a year earlier. Thus it is obvious to concentrate on the “Services” at least till the time the iPhone 7 gets launched and clicks. And App Store is where Apple sells all its services and software. Therefore, even if by sharing the revenue with important value creators like the developers, if Apple could start making more money from services, it will be less dependent on devices which would be a stronger position to be in.
Published on Jun 20, 2016By Vinay Singh